The End of Retirement

by Teresa Ghilarducci

At the end of World War II and during the Great Depression, the United States Congress and President transformed and improved the lives of American workers who were too old to work — either because they couldn’t or employers wouldn’t hire them — by passing the Social Security and Old Age Assistance programs and legally establishing labor unions. The existence of pensions and unions that bargained for pensions meant that many non union companies would meet or exceed union pensions to stop their workers from unionizing. Employer pensions supplemented Social Security and because of these institutions the labor force participation rates of men over age 65 fell from 50% to something under 15% by 2000.

The hallmark of a civilized society and growing economy is that both the rich and the poor live longer and that both are entitled to leisure at the end of their working lives. Yet, as pensions eroded because of the 30-year trend of employers substituting traditional pensions with 401(k) type retirement accounts that are voluntary and individually-directed eroded pensions a political rhetoric emerged that people should work longer. The call to raise retirement ages has intensified as the economic crises starting in 2008 slashed retirement account values and national debt and deficits increased.

Raising retirement ages is not a good policy and support for it is based on two wrong assumptions: one, that people can and should work longer and, that two, society cannot afford to pay for retirement because pensions and health care spending for the elderly take too many resources away from younger people.

Pensions do not limit resources for younger people. A survey of 58 nations shows that government spending on programs for the elderly does not reduce public spending for younger people. The most important determinants of government spending on education and youth health programs are whether or not political forces are allied with the vulnerable members of a population, for example the elderly, young families, and children. When such a political alliance is in place public spending on social insurance increases: my statistical analysis shows that a 10% increase in spending on education spending (as a percent of GDP) is correlated with a 7.3% increase in spending on pensions.

Though many Americans, especially professional workers, can control when they stop working, most workers leave their job before they plan to because of layoffs and health problems. Though a greater share of older Americans are working longer or looking for work than in the last 30 years the evidence suggests that older workers are increasing their labor force participation because pensions as a source of safe and secure retirement income is eroding not because employers have made jobs more attractive, better paid, and easier to do.

The repositioning of retirement as a luxury and no longer affordable depends, in part, on the wrong belief that pension spending takes resources away from other deserving people. There is also the wrong conviction which is more positive that supporting retirement is not as necessary as it once was because the current and future elderly are different: they want to work longer and they are healthier. In fact improved longevity is the main argument for decreasing people’s pensions and time in retirement. But life expectancy was increasing in the 1960s and 1970s when pensions and Social Security expanded. Longer lives do not mean the future elderly should, could, and want to, work longer. In fact, redesigning pension systems so that a worker has to continue to work longer to get full benefits helps employers.

Winners and Losers When Retirement Ages Increase

Populations are aging but demography is not economic and political destiny.. Making people give up retirement time is only one among many policies to cope with population aging. It is true that the young to elderly ratios are decreasing and those ratio declines may make headline news,[ii] but they are not news. Improved longevity is an expected result: population aging is a classic demographic transition – economic wealth lowers fertility, reduces infant mortality, and increases adult longevity. It is, thus inevitable that pensions become more expensive as the number of workers for every retiree falls. Therefore, demography does not proscribe economic policies because in democracies policies are a result of political choices and these choice sets are defined by national governments and international organizations.

The World Bank’s report on pensions in 1994 became a manifesto for cutting state support for pensions and having workers finance their own retirement or work longer—raising the age of retirement is a major way to retrench pensions. The report emphasized the need to change social norms about retirement longer work lives. It advocated penalizing “early” retirement and for private individual pension accounts to replace national social security.

The cover story of the Economist magazine in mid April 2011 screamed “70 or Bust!; Why the Retirement Age Must Go Up.” Raising retirement ages seem to make sense: nations with the oldest populations have some of the smallest elderly labor force participation rates. For instance, among German men, 4 % over the age of 65 work, compared to 16 % American older men who work[iii] and the young to old ratio in Germany is .5 versus the American ratio of 1.3 (see Table 1). But it doesn’t mean that more work will reduce old age spending. Japanese older men work more than any other men in rich nations, but their projected pension expenses are still high relative to the projected expenses for elderly in the United States.

American elders have been working more than people in other nations for decades: the United States is the only Organization for Economic Co-operation and Development nation that bans forced retirement, pays full Social Security benefits to people who have not retired, and has raised the normal retirement age to 67, a much higher age than its European counterparts.

The linkages between longevity and economic hierarchy has been long researched and the conclusion drawn from the relationships is that workers with high socioeconomic stature lose the least when working longer is a norm because they already work more at older ages. One group of workers — educated professionals – is hurt least by raising the retirement age. Professionals began working full time in their mid-twenties and by age 65, have worked fewer years than non-college-educated workers. They are also more likely to enjoy and control their work pace and tasks. In the U.S. white collar male workers’ longevity has grown faster than any other group’s.

Moreover, older workers who are in a high socio-economic status, are more likely to like their jobs and would not suffer significant loss in income if they choose not to work. The gaps in life expectancy between men and women have narrowed but the differences by socioeconomic status has grown larger. Individuals with higher lifetime earnings or more education experience lower mortality rates than those with lower lifetime earnings or less education. [iv]

Employers clearly benefit from a new retirement norm, and that’s why employers are the biggest champions of the new “working retirement” norm. A Conference Board’s (an industry research group) survey was aimed at reassuring its client employers that future labor shortages will partially take care of themselves: 75% of older workers surveyed said they would continue working when they got older because they did haven’t sufficient financial resources to retire.

More American elderly are looking for work since the financial crises of 2009. Economist Rich Johnson at the Urban Institute shows that the 2008 recession was much worse for older American men than any other recession; workers over 50 had to wait longer relative to younger people to get rehired. An increase in the supply of labor invariably redistributes income toward profits away from wages because the pressure faced for wage increases is defused. In general, an expanding labor supply helps employers tame pressure to pay more, to improve working conditions, or to conserve labor by investing to boost labor productivity.[v]

Despite the fact the winners are powerful and the losers are not, the ideas that people want to keep on working, that work is good for people, and that pensions aren’t fair to the young are forceful, widespread, and influential. The life force of the latter idea – that the pensions take resources from the young — is the subject of the next section.

Pensions Spending Does not Mean the Old Eat the Young

The claim that the young will get more resources if nations cut pension spending and the elderly work longer has little support. There is little hard empirical evidence for the claim that pensions systems are designed to transfer funds from relatively powerless younger workers to older, more politically astute, elderly. Instead I find support that pension spending is best explained from what political economists John Williamson and Frank Pampel call a “social democratic perspective” that views generous pensions and Social Security policy “the outcome of a struggle between organizations and political parties representing the interests of capital and those representing the interests of labor.”

Before I turn to the evidence supporting the social democratic explanation for pensions, it is important to be clear on how, mechanically, the unfair transfers may occur if powerful elderly write the pension rules.

The conventional view of intergenerational equity is if the ratio of benefits to contributions going to and coming from each cohort stays about the same across generations.

But this equality outcome does not happen as populations continue to get older and contributions increase. When welfare states are relatively new, cohorts’ contributions vary. Generations, or cohorts, that were middle-aged when the welfare system was established have benefited the most because, their lifetime financial contributions to the program are small relative to the value of the benefits they collect. In this case, benefit ratios are no longer equal, which creates intergenerational inequity:

The claim is that it is not fair to younger generations that were not part of the planning process because they shoulder the costs, while the designers reap most of the benefits. And population ageing can make the imbalance worse — a larger older cohort makes the younger, smaller cohort contribute more to meet the promised benefits. For example, under a fixed replacement rate system — like the U.S. Social Security system — all costs associated with demographic change fall on retirees. Political scientist John Myles brands this cohort size factor as the “intergenerational lottery” and if societies want intergenerational equity they need to set pension rules to achieve “fair burden” sharing. Otherwise, social benefits aren’t created; just “lucky” and “less lucky” generations are created.

But Myles and others are quick to recognize that the distributional aspects of pension systems do not define the distribution in a nation’s welfare system. The elderly may get fixed replacement rates, but could “give back” through higher spending on programs for younger people.

Urban Institute economist Lawrence Thompson, responding to the need for a comprehensive measure of the transfers between generations, projected out to 2030 and predicted the net wage (after social insurance contributions) will be 35 percent higher, while the average retirement benefit in 2030 will be only 18 percent higher than the same benefit in 2003. This means, in the U.S., workers will have a greater increase in living standards than retirees in the future. He also finds families, after education and Social Security taxes are accounted for, transfers, on average over $27,000 to younger generations.

American economists Bommier, Lee, Miller and Zuber compare education spending in the U.S. to Social Security and Medicare spending for various cohorts to find that young people do not have lower rates of return on their taxes than the older cohorts. European economist, Axel Boersch-Supan, examined 16 countries and concluded the generosity of the countries towards the elderly (measured by social expenditures for programs targeting the elderly) does not reduce the share of total social expenditures for programs tagerting youth. I and Ryan Taylor found evidenc using 1986 data from 65 nations and, from 58 nations using 1995-2000 data , estimated that pension spending –government pension spending as a percent of GDP per old person – does not reduce or effect government spending on education (as a percent of GDP per child) hwen just rich nations are examined there is a correlation but it is positive. Rich nations that spend a high percentage of GDP on education also spend a large share on pensions. The simple correlation is 30.8%.

The results do not support the conclusion that the elderly are taking resources away from the young, which undermines “the old eat the young hypothesis.” The strongly significant and positive coefficient on education spending possibly means that pension spending and education go together and that political support for social spending promotes spending for all generations. This could be thought of as social democratic politics or “self-interest” solidarity; that workers support higher pensions, or preserving pensions, because they too will get old and support transfers to workers, young and old. Can we think of class solidarity as younger workers forming alliances with their older selves? A ten percent increase in spending for the young results in an over 7 percent increase in spending for the elderly (as a share of GDP).

In sum, the grim specter that strong-armed generational politics forces young workers to pay high taxes to support the leisure of healthy older people is not supported by this econometric exercise.

Work Is Not Necessarily Good for Older People

At first glance the call for people to work longer makes sense for workers. A first look, it seems that work at old age is healthy: in fact, older men who work are in better health than those who do not. This type of evidence helped support the shift in retirement norms in the 1970s when sociologists sought to explain statistical linkages between ill health, depression, and early death, among retired men. A prevailing interpretation was that retirement caused these ill fortunes because men lost their sense of identity and life’s purpose when they retired.

The problem with the research is that the causation can clearly run the opposite way — that is, negative health could cause retirement, not retirement as the cause for negative health. When the cause of retirement is accounted by Economists Kevin Neuman who found that retirement improves women’s health and slows down the deterioration of men’s health. Women and men reported increases in well-being, more time sleeping, preparing food, and eating, and doing things they like to do when they retired. This means it is likely that the so-called explosion in early retirements, which Gruber and Wise write about, is causing the increase in longevity and it is not happening in spite of it. The implications of the retirement-health ink are that the two trends — earlier retirement and longer lives – cannot be thought of as two unrelated events. More time in retirement may actually be the cause of longer lives! If retirement leads to healthier outcomes, then pension reform aimed at getting Americans (and others) to work longer might inadvertently cause people to die sooner and working more could slow or reverse longevity gains.

The belief that the health and vigor of the elderly workforce is greater than ever before makes raising the retirement age a favorite choice in retirement policy proposals among both liberal and conservative entities. But, longevity is increasing for reasons unrelated to the ability to work longer, the lives of frail adult are being extended and the population is healthier at older ages, though it is not clear that older people are matched to the new jobs. In the U.S, since 1981, the share of older workers reporting limitations in their ability to work has stayed steady. The rate fluctuates with economic activity as one would expect: the rate of self reported limitations decreased slightly in booms and increased in recessions: The rate was averaged 9.37 % during the economic expansion of 1983 through 1990 to over 10.81 % in the economic boom of the 1990s (see Paul Clark). And while the share of jobs demanding physical effort is declining, especially for men, the share requiring good eyesight or computer skills is increasing (see Rich Johnson’s 2004 article).

Working longer is often not a choice for workers who develop health problems or are laid off late in their careers. 40% of workers surveyed are forced to retire earlier than they had planned, with health, or the health of a family member, the reason cited for over half of these early retirements. Age discrimination, layoffs, and plant shutdowns adversely affect older people’s ability to work (Rotenberg 2006). Age discrimination is not illegal in most European nations.

Also many older workers in the United States (the comparable study for Europe has not been done) do not stay in their career jobs. Instead of 60 being “the new 50,” it has become the new 17, as older people re-enter the job market as retail clerks or in other low-paid occupations. Elderly workers over age 65 have jobs with less status than workers aged 55-64. (They are less likely to be in occupations classified as “executive,” “professional,” or “technician” and more likely to be in “sales” and “service” occupations. (See Sara Rix at AARP

Advocates for raising the retirement age, including economist Alicia Munnell are aware of the physical limitations older blue-collar workers have, the changing nature of jobs, and the existence of chronic age discrimination. And it is not controversial to advocate that workers get the jobs they want at all ages. However, it is less likely that older workers will obtain jobs on their own terms if their retirement income is more insecure.

Distributing leisure at the end of one’s work life has a special meaning that doesn’t take away from the importance of vacations, weekends, and holidays. There is considerable evidence that the elderly enjoy free time, like we all do, but for a reason that is particular to older people – time is getting scarce.[vi] If every relevant aspect is the same, a retired person is better off than an older worker because the retiree has more time to recover from mistakes. The boost in time can help compensate for many losses in the aging process.

Congress Promotes Work at Older Ages

A growing acceptance of later retirement are a result of social policy directed at encouraging longer work lives. In 1983, Congress moved to change retirement norms. Congress cut benefits for retirees 17 years in the future[vii] by incrementally raising the normal retirement age starting in 2000. The normal retirement age will gradually rise from age 65 to age 67 by 2022. Under the Social Security system, beneficiaries receive an increased payment per month for each month they delay claiming benefits. For beneficiaries at or over the normal retirement age, the increased payments for delayed claiming are made through the delayed retirement credit (DRC). For workers born in 1943 or later, the DRC is equal to 8 percent of the worker’s PIA for each year of delayed claiming beyond the

Besides the primary goal to reduce future Social Security pension liabilities, Congress aimed to raise the age Americans use as “anchor” for what they consider to be the “normal” retirement age.

The rise and maintenance of a youth culture connects to business interests in profound ways. What appears to be social and cultural, actually reinforces the interests of those who want us to work longer. The pain of diminished pensions is met with less resistance if the financial threat of having to work until age 70 is muted with flattery. Believing 70 is the new 40 helps older people psychologically repress the negative feelings that come with having to work longer than they wanted.

Implications of Raising the Retirement Age to Cut Pensions

There are many ways to respond to population aging; but, political and economic forces in European and American societies are cutting benefits and therefore fashioning a response that goes in only on one direction – towards the rise of elderly work.

It is not ideological to argue that if workers have less free time at retirement ages because they have to make up for lost income — pensions and health care (in the U.S.) are eroding — they are worse off.

Conspicuously, policies, cultural norms, etc. aimed at delaying retirement create classes of winners and the winners are prone to overstate the benefits to society from changes that benefits them. The policies and retirement norm changes also create losers, and it remains to be seen if the losers will speak up.

This study addresses the new social contract on retirement in wealthy nations. The old social contract on retirement as one where people could choose to retire or not even if they were healthy and able to work past a certain age. This expectation had just developed in the post World War II period and came about because of economic growth and negotiations about where the fruits of that growth would be distributed between labor and capital.

Perhaps it is true, as many would have us believe, that older people everywhere want to have less retirement and I support sensible changes to pension rules that increase pension benefits as people work more or balance taxes and benefits to avoid huge payoffs in what Myles calls cohort lotteries. But reducing pensions, promoting the scientific veracity of economic trade-offs that don’t exist, and manipulating popular culture to promote work as a way to avoid aging and to demean old age leisure as indulgences of greedy geezers, veils a reversal of fortunes for the working-class and middle-classes.

Table 1The Average Years of Retirement and Pension and Education Spending inWealthy Nations, ranked by the age of the population (circa 1995)

[iii] Actually, the United States, with a high proportion of elderly workers looks more like a poor nation than a rich one. Old people in nations with per capita GDP half as the U.S., work just as much as they do in the U.S. In 2001 in the United States, the labor force participation rates of men between ages 65 and 70 ranged from 38.7 % to 24.5 % , which is similar to rates in North Africa at 29.2 %. In Asia (dominated by China and India) 42 % of men over age 65 work; in Europe 14.9 % work (Clark 2004, 118).

[v] Advocates for longer work lives should not be confused with advocates like the National Center for Black Aged, who argue for better working conditions for elderly people forced to work after age 65.

[vi] After Gary Becker’s 1971 treatise on time most economists stopped using the word “leisure” (individuals were either producing time-intensive goods or goods-intensive goods) and stopped dealing with leisure as any special source of well-being. The political struggles for the eight-hour day, sick leave, vacations, lunch breaks, and retirement time became irrelevant to economic inquiry. Leisure consumption merely represents personal decisions about how to spend an endowment of time and skills.

[vii] The Greenspan Commission did not recommend the increase in the retirement age!!; testimony before the Social Security Trustees suggested that longevity trends did not indicate that the elderly were able to work longer. Congress added the provision in order to gain more revenue and to play it safe by cutting benefits for future retirees (Ball 1999, 175).

Teresa Ghilarducci is the Bernard and Irene Schwartz Chair of Economic Policy Analysis at the New School for Social Research. Her 2008 book, When I’m Sixty Four: The Plot against Pensions and the Plan to Save Them (Princeton University Press). Ghilarducci’s current 2 year project, “Beyond the 401(k): Guaranteeing Retirement Security,” is funded by the Rockefeller Foundation.